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You want to invest $41,000 in a portfolio with a beta of no more than 1.55 and an expected return of 13.1% Bay Corp. has a be

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Answer #1

a.      
Required portfolio beta=   1.55  
beta of Bay Corp.=   1.14  
Beta of city Inc.=   1.83  
Required beta is in between betas of two Stock's. so it is possible to create a portfolio with required Beta.      
Answer is yes      


b.      
Assume weight of Bay Corp=   x  
So weight of city inc. = 1-x      
      
Portfolio beta = (Beta of Bay corp.*Weight of Bay corp.)+(Beta of City inc.*Weight of City inc.)      
1.55 =(1.14*x) + (1.83*(1-x))      
1.55 = 1.14x + 1.83 - 1.83x      
1.83 x- 1.14x= 1.83-1.55      
0.69 x =   0.28  
x= 0.28/0.69=   0.1932  
Weight of Bay corp. =   0.1932  
weight of City Inc. = 1-0.1932=   0.8068  
      
total investment=   $1,000.00  
Investment in Bay corp. = 1000*0.1932=   $193.20  
Investment in City Inc. = 1000*0.8068=   $806.80  
      

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